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Unit 6: Investment Strategies-I

6.1.3 Asset Allocation Strategy Notes

Asset allocation is a simple concept, yet vital to long-term investment success. In fact, a landmark
study cited in Financial Analysts Journal showed that 91.5% of the average total returns earned by
pension plans over a 10-year period (from 1977-1987) was the result of the plans’ asset allocation
decisions. For many individual investors, the asset allocation decision amounts to choosing
what types of mutual funds to invest in and the amount to invest in each type of fund. Others
may want to add individual securities to this mix after exploring their investment options.

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Caution Regardless of the asset allocation strategy you choose and the investments you
select, keep in mind that a well-crafted plan of action over the long term can help you
weather all sorts of changing market conditions as you aim to meet your investment
goal(s). Please note, however, that asset allocation does not guarantee a profit or protect
against a loss.

Points to Remember

1. Asset allocation is the way in which you spread your investment portfolio among different
asset classes, such as stocks and stock mutual funds, bonds, and bond mutual funds.

2. When prices of different types of assets do not move in tandem, combining these
investments in a portfolio can help manage the variability of returns, commonly referred
to as “market risk.”

3. Mutual funds are pools of securities, usually offering diversification within a single asset
class. Some mutual funds may include several asset classes.
4. The asset allocation that is right for you depends on your investment time frame, goals,
and tolerance for risk.
5. As your investment time frame and goals change, so might your asset allocation. Many
financial experts suggest re-evaluating your asset allocation periodically or whenever
you experience a milestone event in your life such as marriage, the birth of a child, or
retirement.
Asset Allocation is a method of diversification which positions assets among major investment
categories. This tool may be used in an effort to manage risk and enhance returns. However, it
does not guarantee a profit or protect against a loss.

Self Assessment

Fill in the blanks:
1. ……………………is the way in which you spread your investment portfolio among different
asset classes, such as stocks and stock mutual funds, bonds, and bond mutual funds.
2. …………………. Strategy can help reduce what is known as “single-security risk”.
3. ………………carry a high level of market risk.

4. ……………………….. are the most stable of all asset classes in terms of returns.
5. Asset allocation refers to the way in which an investor weighs investments in their …………

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